As editor at large for Inside Asian Gaming following nearly a decade as a special correspondent for Macau Business magazine, I cover the casino business in Macau and throughout Asia. I’m also a columnist for Asia Times and The Guardian. After writing in the US for The New York Times, Washington Post, Sports Illustrated and others, I joined CNN as a news writer and producer in Washington, then moved to Hong Kong in 1995 (for six months, I thought) as a producer with CNBC. In Hong Kong, I returned to print at Bloomberg as a regional business editor, worked as an editor at both Hong Kong English language dailies, and headed Asia-wide media relations for a top US multinational. I’m also the author of Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie, and founder of Writing Clinic, where writing gets better. You can follow me via my website www.muhammadcohen.com, on Facebook and Twitter @MuhammadCohen.

Japan Forms Casino Task Force To Boost Flagging Momentum

Prime Minister Shinzo Abe’s government is creating a task force to jump start preparations for casinos in Japan, when and if the lawmakers in the Diet approve legislation to enable so-called integrated resorts (IRs). The 1.7% fall in Japan’s GDP for the second quarter shows that the initial impact of Abenomics has petered out; IRs are part of the reform the prime minister promised but has largely failed to deliver.

The Abe administration hopes the task force will revive momentum for IRs to be developed by the 2020 Olympic Summer Games in Tokyo after the casino bill languished in the Diet. The task force may also be the Abe administration’s way to keep enthusiasm from waning among the gaming companies that say they’re ready to spend $5 billion or more to build IRs. Even discounting the dismal second quarter economic landscape, Japan’s numbers may not justify that level of investment.

The casino legalization bill, introduced last December, failed to come for a vote in the regular Diet session that concluded in late June, despite backing from Abe, his Liberal Democratic Party ruling coalition and a multiparty casino caucus. Supporters brought the casino bill up for debate days before the close of the session, a maneuver that makes it eligible for consideration in the Diet’s special session expected to open within the next two months.

A casino legalization bill, introduced last December, failed to come for a vote in the regular Diet session that concluded in late June, despite backing from Prime Minister Shinzo Abe.

A recent Morgan StanleyMorgan Stanley report enumerates many issues facing Japan’s IR ambitions and examines prospects for the market. Analysts Praveen Choudhary, Thomas Allen and Alex Poon conclude that Japan may not be as nearly profitable as casino companies dream. Consensus estimates for annual gaming revenue hover around $40 billion for IRs in Tokyo and Osaka plus up to 10 smaller ones in other areas, nearly as much as Macau last year, and six times bigger than Las Vegas or Singapore. After all, Japan is still the world’s third economy, with a population of 128 million and a thriving gambling culture that includes the world’s highest racing handle, plus pachinko, Japan’s unique pinball and slot machine hybrid that had estimated revenue of $36 billion last year.

But even things that look simple often aren’t in Japan. There were half as many Japanese playing pachinko in 2012 as in 2002, and there’s no assurance that pachinko players will become casino patrons. Global Market Advisors partner Andrew Klebanow believes casinos won’t fill the role of pachinko parlors as a neighborhood gaming hall. “Las Vegas offers a perfect example,” he says. “The city has dozens of resort casinos with over 150,000 hotel rooms and over 70,000 slot machines, yet there are hundreds of taverns, slot parlors and other locations that offer a few machines each. They all do very well operating in the shadows of the largest gaming venue in the United States.” Morgan Stanley estimates perhaps 20% of Tokyo pachinko players will migrate to casinos, meaning slot revenue of $1.2 billion, well below most estimates.

The Morgan Stanley analysis suggests Japan’s casino gaming revenue could be roughly half the consensus estimate, just $21-22 billion. It reaches that figure through two different, independent calculations, the ratio of gaming revenue to GDP in Asian and US gaming markets and the ratio of gaming revenue to lottery turnover in Singapore, which has the highest such ratio in Asia. The report also analyzes empirical data, such as falling population and contracting leisure and entertainment spending, which back up the top down analysis.

Singapore, with two hugely expensive (and hugely profitable) IRs opened in 2010 amid much public unease, is a likely model for Japan’s legalization efforts. To temper the social impact, Japan may follow Singapore with a casino entrance tax on its citizens and a tough line on junket promoters. Whatever the merits of these choices, they will suppress casino revenue.

Japan will diverge from Singapore on a key issue that promises to reduce profits further. For Singapore, IRs were about creating a “buzz,” in the words of Prime Minister Lee Hsien Loong and attracting more tourists, goals that have largely been achieved. Japan’s government would like a new buzz and more tourists (whether it will get them is highly uncertain, even with the Olympics), but what it really needs from IRs is revenue. The second quarter GDP contraction was blamed on a rise from 6% to 8% in the consumption tax, Japan’s version of sales tax, and a second rise is due next year to tackle mountainous government debt. Japan won’t set casino tax rates as low as Singapore’s 12.5% on VIP play and 22.5% on mass market revenue. Higher taxes will hit the bottom line for casino operators, who will likely face taxes at the national and local levels, as well as corporate income tax.

Those lower returns should temper the bidding frenzy among operators that has led to talk of a $10 billion IR in Tokyo. The Morgan Stanley report estimates IR revenue of $5 billion in Tokyo and $2.5 billion in Osaka. If casino companies require the 20% return on capital achieved in other Asian jurisdictions, then the maximum to invest in Tokyo will be $4.2 billion and $2.1 billion in Osaka. Given high labor costs, particularly in light of the Olympics, those numbers will buy less in Japan than in other jurisdictions, and may lack the wow factor that new resorts in Macau or even Manila will deliver.

Japan will be a good gaming market but likely not the gold mine that international casino companies have envisioned. If the task force can’t revive legislative momentum toward legalization and the domestic economy heads further south, a wave of sanity could temper expectations and enthusiasm among casino companies, just what Prime Minister Abe and his foundering economy doesn’t need.

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I saw where Las Vegas Sands was running at a record 26% market share in Macau for August. Combine that with movement on gaming in Japan, where Sands appears to be in the pole position for a major IR, and one would expect some serious buzz on Wall Street.

Not so, as the stock continues to trade at excellent value below $70 per share.

For those with the long view as bridges to Hong Kong get built, Hengqin island becomes the next Orlando, and Cotai erupts in an explosion of Critical Mass over the next few years, it surprises me that buying into the dominant force in ALL of those geographies can be had so inexpensively.

I don’t know what gives you the idea that LVS has “pole position” for an integrated resort in Japan. From what I know, LVS has focused on Tokyo, certainly the top choice, but local government there is decidedly cool to IRs. Osaka and vacation destinations are much more gung-ho about casino resort development.

It’s becoming increasing apparent that IR development in Japan will be collaborations between Japanese and foreign companies. That arrangement may be mandated by law or practiced informally, but it’s a near certainty. LVS, at least under chairman Adelson, has a track record of not playing well with others. Macau, where it broke up with Galaxy, is a glaring example. That split worked out for LVS (though its draft operating contract with Galaxy would have yielded piles of money with no investment risk). But Japan won’t bend over backwards the way Macau did to accommodate LVS, particularly since any partner there will be a major Japanese player, not a then-virtual no-name like Galaxy.

In its favor, LVS has its very able director of global development George Tanasijevich spearheading its efforts in Japan. Mr T brought home the license in Singapore and shepherded the development of what’s become the prototype urban IR, Marina Bay Sands. That’s the kind of development Japan is looking for in Tokyo and Osaka, but developers in Macau and Las Vegas, and even Vietnam and the Philippines, have demonstrated they too can hire world class architects and designers to create stunning properties.

LVS certainly will be a top candidate in Japan, but I wouldn’t put designate it the favorite by any stretch. Nor would I count on IRs opening in Japan within the next eight years.